My brother had a very interesting observation the other day. We were having a conversation about building wealth and he said that one of the best gages is to understand your "Interest Collected vs. Interest Paid ratio" (ICIP Ratio...I just made that up). The more I thought about it the more I completely agree that it is one of the best ways of knowing how financially healthy you really are.Let's compare two different people:
Mr. DooDad is a good earner, 125k year, but really enjoys his toys. As a matter of fact, he has yet to see a toy he does not like. Because of this "DooDad" addiction, his ICIP ratio looks like this:
House $1500/mo interest
Car 1 $250/mo interest
Car 2 $175/mo interest
Boat $475/mo interest
Credit Card $225/mo interest
Interest Paid $2625/mo interest
401k $125/mo
Money Market $12/mo
Interest Collected $137/mo
Mr. Doodad collects a measly $137 a month in interest and pays $2625 a month interest. So his ICIP ratio is 1:19.
Mrs. Wisdom is also a good earner, 100k year, but she has used her cash to buy assets that she can collect interest on. She has been wiser with her money, buying her cars in cash and never using a credit card. Her ICIP ratio looks like this:
House $1000/mo interest
Rental House1 $750/mo interest
Rental House2 $1100/mo interest
Interest Paid $2850/mo interest
Rental House1 $1400/mo interest
Rental House2 $1750/mo interest
401k $1500/mo interest
Roth IRA $750/mo interest
Indexed Fund $2500/mo interest
Money Market $150/mo interest
Interest Collected $8050/mo interest
Mrs. Wisdom collects a whopping $8050 a month in interest and only pays out $2850 a month so her ICIP ratio is 3:1. Over time, as her renters pay off her rental house mortgages, her ratio will climb to 8:1.
Spend 10 minutes and figure out your ICIP ratio. Are you closer to a Mr. Doodad or a Mrs. Wisdom? How long will it take you to retire by following Mr. Doodad's plan? The rhetorical question's answer is probably forever!
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